Sunday, June 8, 2008

What Goes Up…

The Sunday, June 08, 2008 edition of The Columbus Dispatch included a story titled "County tax bills to stay the same."

I thought that was a strange thing to say, given that Ohio law provides for this anyway. It turns out that there's much more to it – as is often the case with such political pronouncements. But first some history:

In the mid-1970s, George Voinovich drove for the adoption of what is today commonly called House Bill 920 (HB920), which was designed to protect Ohio homeowners – especially those in Voinovich's hometown of Cleveland – from being taxed out their homes as real estate value skyrocketed. The simple explanation of this legislation, which became section 319.301 of the Ohio Revised Code, is that your property taxes stay the same even if the county auditor's office increases their assessment of the market value of your property.

While Ohio property owners very much like this concept, in discussions about school funding one will often hear school leaders complain about HB920 and how it prevents property tax revenues from increasing with inflation. Here are a couple of quotes I found out on the web (there are many more if you want to look):

  • "HB920 is one of the fundamental problems with the school funding system in Ohio. Since it prevents operating levies from growing with inflation, it forces school districts to return to the ballot on a regular basis." - Milford Exempted Village Schools.
  • "In school funding it is inevitable that expenditures will exceed revenue; it's inevitable. Every school system in the state of Ohio faces this dilemma because revenue by HB920 does not grow; it's intended to be that way through legislation. So, when a levy is passed it never exceeds the amount the voters voted on. In business you are working on profit and hoping to increase your profit; in schools we know that our revenue is not going to increase by any means of any profits, so what taxpayers voted on is what HB920 assures will happen and that is the revenue remains at what was voted on." Pickerington Schools.

And here is the transcript from a panel discussion on Cleveland's WCPN-FM on September 12, 2000.

Our own Superintendent Dale McVey has been heard to say that "HB920 does not allow our revenue to increase with inflation."

Of course, in that statement, Mr. McVey is equating changes in home values with inflation. He is also saying that the operating costs of our schools increase with inflation as well. Neither is true.

Our operating costs increase because of the compensation structure of the union contracts with the teachers (HEA) and staff (OAPSE), as well the compensation program for administrators. These costs don't change with inflation – which has been very low over the past decade – they're the product of the collective bargaining process which is built on the belief that we, the taxpayers of the school district, will eventually cave in and pay whatever it takes to cover the deal that gets negotiated. That theory is currently being put to the test.

And it should be clear to everyone at this point that home values do not change with inflation either. Home values are a reflection of the demand for housing in a neighborhood and the supply of available homes. That demand for specific neighborhoods is driven by the level of desire parents have to get their kids into a particular school system (and sometimes even which school building within a school district). In general, the better the schools, the higher the home prices. That's why Bexley and Upper Arlington home prices have been high for decades: great schools and a limited supply of housing because neither city has room for residential expansion.

Suddenly, we have entered a time when the housing market has gone soft – very soft. One has only to drive around our community and observe the quantity of homes for sale, many for months and months. Even though many homes in Hilliard are being offered for what looks like bargain-basement prices, there is still a shortage of buyers, because most of those buyers have homes of their own that they must first sell. We have yet to see the bottom of the market I suspect.

If home values have gone down dramatically, that should at least mean our property taxes will go down too, right?

Nope. This is the flip side of HB920. While it prevents schools from getting any extra revenue (per property) when property values are going up, it also protect those schools from getting any less when property values go down. As said recently by Franklin County Auditor Joe Testa: "Frequently I am asked his question: 'If property values actually did decline, how much of a tax break will we see?' The surprising answer is, almost nothing. Why? It is because Ohio tax law protects schools, social service agencies etc. during down markets in the same way it protects homeowners during up markets through a tax rate adjuster called 'reduction factors."

There is however some criticism with the broad-brush declaration by state and county officials that, across the board, there will be no increase or decrease in assessed property values in the 2008 triennial reassessment. After all, isn't it obvious that the home values in the neighborhoods with tons of foreclosures have gone down much more than in more stable and affluent neighborhoods?

This general declaration of unchanged property values was necessary to keep from triggering an even more obscure element of the HB920 law, which provides that if the change in the value of your property is greater than the average change in value of all properties in your taxing district, then your property tax bill will be adjusted in relation to the rest of the taxing district. By declaring that all property has had no change in appraised value, by definition everyone's property tax bill stays the same.

The alternative to taking this position would be a political nightmare for our elected officials. For example, there are a number of new developments in our school district which were built precisely to market to individuals via the subprime loan mechanism. Those are the neighborhoods with high foreclosure rates and consequently the houses there have seen the largest decrease in value compared to other housing in the school district. If the County Auditor came in and reassessed only those properties to a lower value, then the change would be greater than the average change across the school district, and those property owners would indeed have their property taxes lowered while the rest of us would continue paying the same taxes as now. How well do you think that would have gone over?

By the way, the same thing would have been true in reverse if we were still in a booming real estate market and the County Auditor went into Ballantrae for example and said home values there had increased at a much higher rate than home values in the rest of the school district – the Ballantrae home owners would have had tax increases while the rest of us would have had none.

So this move by the County Auditor to keep appraised property values constant is a way to game the system to protect the schools and other property-tax funded governments and agencies from a significant decrease in revenue. It also shields them from the political morass of deciding which neighborhoods and tax districts get a break, and which get screwed.

That doesn't mean there is no exposure for the schools. Any property owner can make an appeal to the County for a reassessment of their particular property. Hundreds, of not thousands, of people filed such appeals in Franklin County recently, and those who won their appeal were rewarded with lower property taxes. How many more will do this in the near future?

Perfect Storm….


  1. At the May 27 school board meeting, the treasurer reported he expected residential appraisals would go up 2%. Since they will be unchanged, I wonder if this will prompt them to increase millage requested for the Nov levy.

  2. Paul,

    A technical correction.

    HB920 is only the latest version of a property tax reduction concept that has existed in Ohio for 80 years.

    It's an interesting history that reflects the changes in Ohio's economy. But, there has always been a protection against tax changes due to reappraisals (always rhetorically defined as 80 years or so).

    That said, HB920 only deals with outside mills. So, taxes do rise and fall with property values based on the up-to-10 inside mills (typically 5 mills allocated to the school district).

    Then, of course, there is the interplay between property values and state funding (if you district is not on a guarantee that is).

    Del. Co. Auditor Hanks is also playing this game. I would bet that he fears reduced values and reduced tax receipts.

    Funny, when values rise the governmental entities demand every incremental penny. Yet, when values fall, they fight to keep the change that should stay with the homeowner.

  3. Even if property value were increased by 2% as a result of a reappraisal, the provisions of HB920 would nullify any property tax increase.

    What Mr Wilson actually said that he: "anticipated values will be up 2 percent due to new residential and agricultural growth." In other words, he believes there will enough new houses built in our school district to increase the revenue from local residential and agricultural sources by 2%.

    The last I asked the County Auditor's office, the residential and agricultural property in our school district was valued in excess of $1 billion. It's clearly more than that now, but I don't know how much.

    But even if it were still $1 billion, a 2% increase in property value would mean $20 million in new construction. At an average of $200,000 each, this would take 100 new houses, a plausible number.

    But there's a good chance that 100 new houses means 100 new kids and $1 million in new operating expenses for the school district. And that means another $600,000 or so the rest of us will have to cover, as those new houses will generate only about $400,000 in new taxes.

  4. Jim: Thanks for the clarification.